Anatomy of a Scam: Wells Fargo’s Treachery Can Happen Anywhere

If you knew your customers were being deceived, why didn’t you stop it?

If you didn’t know, why?

As Wells Fargo CEO John Stumpf knows, it’s a bad day at the office when any answer you give is wrong. His company got slapped with a $185 million fine from the US government, and is now the subject of a Federal fraud inquiry. As of this writing, Wells Fargo has neither admitted nor denied the allegations.

But Stumpf’s responses to Senator Elizabeth Warren’s questions during a congressional hearing today didn’t go well. In an exchange that will be studied in B-school leadership and ethics courses for many years, Senator Warren eviscerated him. “It’s gutless leadership,” she said. “You should resign.” Stumpf had no response.

“How probable is it that you would have a firm-wide, multi-year scheme involving thousands and thousands of people that senior leaders weren’t aware of,” Jordan Thomas, a former Justice Department trial lawyer, asked last week. Answer: not very. As financial journalist Roger Lowenstein quipped, “[5,300] people don’t just wake up in the morning with the same bad idea.”

Stumpf said he “feels accountable” for the fraud that Wells Fargo allegedly committed, but added that employees didn’t honor the bank’s values. Mr. Stumpf, I have a suggestion: The best response is “I am accountable. Period.” Not, “I am kind of accountable, but here’s how my underlings screwed up . . .” A leadership coach would charge a large fee for that advice. I offer it for free.

It’s hard to know what’s more odious – Stumpf’s mealy “feels accountable” lamentation, the deceit that Wells Fargo committed underneath its imperious-sounding Vision and Values Statement, or the fact that 5,300 Wells Fargo staff lost their jobs for engaging in practices that overwhelmingly enriched its senior executives. Who, by the way, are all still employed.

Regardless, it’s disgusting to see Stumpf’s smiling face on the Vision and Values web page, next to his mendacious quote, “Everything we do is built on trust. It doesn’t happen with one transaction, in one day on the job or in one quarter. It’s earned relationship by relationship.” Odd that his picture doesn’t show him wearing a loud plaid sport jacket, open collar shirt, and a cheap gold necklace.

“Honesty, trust, and integrity are essential for meeting the highest standards of corporate governance. They’re not just the responsibility of our senior leaders and our board of directors. We’re all responsible. Our ethics are the sum of all the decisions each of us makes every day. If you want to find out how strong a company’s ethics are, don’t listen to what its people say. Watch what they do.”

We now know this paragraph is just well-crafted marketing horse poop. While Wells Fargo proudly displayed it to the world, its senior managers put employees under their boots, pressuring them to sell, sell, sell! We’re just starting to learn how they did that, and it ain’t pretty.

“We put our customers at the center of everything we do and give them such outstanding service and guidance that they’ll give us more of their business, honor us with repeat purchases, and rave about us to their family, friends, and business associates. We want to be the first provider our customers think of when they need their next financial product.”

Immediately below the Customers-first priority lurks the second priority, Growing revenue. The smoking gun that destroyed the first:

“Wells Fargo is a growth company that believes the key to the bottom line is the top line. “We see opportunities to continue increasing revenue across all of our businesses and serve more of our customers’ financial needs. For example, we want more of our retail bank customers to consider us for their brokerage and retirement needs. And we want to continue expanding the number of customers who have a mortgage or credit card with us. We also want to be the bank of choice for our business, commercial, and global customers.”

No joke. Forget soft-sounding platitudes like consider and be the bank of choice. Wells Fargo means every word about their strategic intentions. “Cross selling and aggressive sales tactics are core to company’s business model . . . Sales goals were huge,” according to Wall Street Journal reporter Emily Glazer, who has covered this story. Whereas most banks average three accounts per customer, Wells Fargo established a sales target of eight. Why? “Eight rhymes with great.” A catchy jingle that Wells Fargo included in their 2010 annual report, which Senator Warren used to lambaste a speechless Stumpf.

This is a sales scam that happened at a bank – not a banking scandal. A scam that could happen anywhere. All you need are the right ingredients: 1) manic focus on growing revenue 2) substantial bonuses tied to stock price, 3) misaligned sales incentives, and 4) weak internal governance. Voila! A putrid, fecund environment for a sales scam. It doesn’t matter whether you’re hawking financial services, precision electronics, IT outsourcing, or anything else.

Show me salespeople repeatedly engaging in bad sales practices, and I’ll show you a manager responsible for it. For investigators, the spotlight shines on Stumpf and Carrie Tolstedt, the bank’s former head of retail operations, who announced her resignation in July. Ms. Tolstedt, 56 years old, plans to retire this December. In her role as head of retail operations she had responsibility for Wells Fargo’s business with 40 million retail banking customers, and “led the bank’s efforts to cross-sell products to individual customers. Sales goals connected with cross-selling also fell under Ms. Tolstedt’s remit. More than three dozen current and former Wells Fargo employees told The Wall Street Journal that those goals defined the retail bank’s culture and led many staff to engage in practices that are now under question,” according to a September 20 Wall Street Journal article, Wells Fargo Official in Eye of Storm. Ms. Tolstedt’s compensation in 2015 was $9.05 million, according to the bank’s 2015 proxy statement. When she retires from the company, “she will collect a pay package valued at $112.9 million.” Enough to pay for a decent lawyer.

Known internally as ‘the watchmaker’ for her attention to detail, Tolstedt earned high praise from Stumpf, who called her “a standard-bearer of our culture, a champion for our customers, and a role model for responsible, principled, and inclusive leadership.” I understand why. Until early 2015, Wells Fargo posted 18 consecutive quarters of year-over-year profit growth. But given the bank’s current ignominy, Stumpf’s laudatory words for might be a bitter pill for those who were summarily fired for “underperformance.” As Senator Warren pointed out, a teller who steals a handful of $20 bills from the cash drawer would go to prison. In her view, Wells Fargo Executives perpetrated a more heinous crime, and have so far escaped prosecution.

A trick for driving revenue: manipulation and deceit. A revenue scam such as Wells Fargo’s always involves exploitation of trust. There are typically two categories of victims: sales staff and customers.

Exploiting staff. A district sales manager once told me, “I look for salespeople who have a mortgage, a stay-at-home wife, a baby, and another on the way.” Translation: “I need people I can control like a marionette puppet.” Wells Fargo pulled the motivation strings with a vengeance. “[Wells Fargo management] are putting pressure on employees, and it’s sad. People need their jobs,” said Mita Bhowmick, a former Wells Fargo teller in Pennsylvania, who took early retirement in 2014.

In the coming weeks, we’ll hear painful testimony from many current and former employees. People with limited job mobility. Single mothers and fathers struggling to pay rent and household bills. Adults supporting an elderly parent. Those living in communities where few job alternatives exist. They will share stories about onerous quotas, “stretch goals,” and living under the constant threat of demotion and firing. They are the among the people that Wells Fargo ruthlessly took advantage of to achieve their aggressive performance metrics.

“The bankers churned the accounts. They didn’t produce profits. They did it because of a misaligned incentive system. The [sales staff] made a minimum wage and could only make more if they duped customers,” Ed Mierzwinski of the US Public Interest Research Group said in an NPR interview with Jane Clayson (Scandal, Sham Accounts at Wells Fargo).

With sales commissions, you get what you pay for, and more. “Wells Fargo built an incentive-compensation program that made it possible for its employees to pursue underhanded sales practices, and it appears that the bank did not monitor the program carefully,” said Richard Cordray of the US Consumer Financial Protection Bureau.

Exploiting customers. Putting customers – especially the naïve or vulnerable – under the influence of a salesperson with devious intentions creates a sickening business relationship, and constitutes a serious abrogation of trust. Regulators have accused Wells Fargo of collecting millions of dollars in fees from customers for accounts they never authorized, a practice alleged to have started as early as 2011. “This widespread practice gave the employees credit for opening the new accounts, allowing them to earn additional compensation and to meet the bank’s sales goals . . . consumers, in turn, were sometimes harmed because the bank charged them for insufficient funds or overdraft fees because the money was not in their original accounts,” the Consumer Financial Protection Bureau said in a statement.

According to a former Wells Fargo employee, “The customers were told in phone calls that Wells Fargo planned to send them a new credit card as a ‘thank you’ for their business. If a customer didn’t want the card, he was told to cut the card when it arrived in the mail.”

Damaged credit scores, inability to qualify for loans, missed opportunities for a college education, unfulfilled dreams. None of these devastating customer outcomes mattered to Wells Fargo executives, as long as the company’s stock price was on a positive trajectory.

Finally, in addition to the other conditions, a successful sales scam requires another crucial cultural element: fear. Above all, management must crush dissent and opposition. There are proven ways. “If somebody said, ‘This doesn’t make sense. Where are you getting these sales goals?’ then [the response] was, ‘No, you can do it’ or ‘You’re negative’ or ‘Oh, you’re not a team player,’” said Ruth Landaverde, a former Wells Fargo credit manager.

There’s a difference between telling people you’re responsible, and acting responsibly.

1. has not resigned from his position as CEO,
2. has not returned “one nickel” of bonus or stock gains he received while the scam was taking place (Sen. Warren calculated his personal gain to be $200 million),
3. has not fired a single senior manager or C-Level executive.

So much for “feeling accountable.” Meanwhile, Stumpf has already impugned the bank’s staff for not upholding Wells Fargo’s values, and under his watch, 5,300 employees were fired for “inappropriate sales practices.”

If there was ever a time for a board to can a CEO, claw back his bonus money, and tell him never to return, now would be it. I hope Wells Fargo’s board does the right thing. But that’s doubtful. The board knew about the cross-selling problems as early as 2013. Some people believe the board should have recognized the risks that that the bank’s pay and bonus plans would bring.

Just as important, I hope the governance reforms that ensue from this case will permeate into industries outside banking. The “perfect storm” for a scam can corrupt any business.

Andrew (Andy) Rudin is Managing Principal of CONTRARY DOMINO. Andy provides expertise and solutions to companies seeking to strengthen sales governance, revenue risk management, and ethical compliance (GRC). His cross-industry background in marketing, sales, and product management uniquely positions him to help companies in many industries manage a wide range of revenue growth challenges. Andy has a BS in marketing and an MS in information technology, both from the University of Virginia.

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